Why You Should Budget

Starting a full time job after college is a radical change of life. When I started working full time in June 2013 the realization hit me; for the last seventeen years of my life I have been a student. All of a sudden I am supposed to shift gears entirely, and spend the next forty years or so being a working man!

This change, while daunting, brings many positive things. Foremost is money! Instead of scraping by on minimum wage jobs and spending money on tuition now you are raking in the dough! But along with this newfound income comes new expenses; student loans, car payments, perhaps insurance and phone bills for people moving off their parents’ plans, and maybe even a mortgage someday.

How can we balance this new influx of money with our new expenses? How can we make sure we don’t blow all our new funds right away and set ourselves up for financial success down the line?

The answer, as you might guess from the title, is simple: budgeting!

If you were hoping for some shiny new trick, sorry to disappoint you. Budgeting is the tried and true method for taking control of your finances. There is already a ton of info about budgeting out there on the web (click here) so I won’t get into the minutiae. Rather, I’m going to spend a little more time convincing you why you should budget and then give some overall tips in another post.

You would be surprised how many people don’t have a budget. So if you don’t have one don’t feel bad – you are not alone. The reasons people don’t budget vary; some people don’t know how, some find it too boring, some think it’s too much work, some don’t think they need to budget, and some people frankly are just plain scared to sit down and look at their finances.

If you don’t know how to budget, you are in the right place! Good on you for taking the time to learn how. You can read through the rest of this article for some tips and check out the link above for more resources.

If you think budgeting is boring… well you’re probably right. It would take a sick individual to get pleasure out of numbers and spreadsheets. Yet life is full of boring things that you have to do. How many people find some aspect of their job boring but still do it? And why do they do it? Because they get paid to do so! So why not spend a little time doing something boring that will pay you (in money saved)?

Fortunately, budgeting doesn’t have to take a lot of work. It can take a bit of time and research at first, but once you get things rolling there is minimal time required. I spend maybe ten minutes per week on my budget. That’s not a lot of time.

If you don’t think you need to budget… well, maybe you are right. There are some people out there that naturally have their expenses figured out, don’t spend much, and save a lot. But those people are few and far between. Let your bank account do the talking. If you are living paycheck to paycheck or struggling to pay bills then you’re the person that needs to budget.

Finally, there are some people who are scared to budget since that means taking an honest look at their finances. And than can bring some scary results (“I spent that much on coffee!” or “I owe how much on my credit cards?!”). While it can be scary, and even shameful to admit where you are at financially, budgeting is the first step to taking hold of your finances and making them not scary.

I hope that this post has convinced you of the importance of making a budget. As mentioned, you can check out the google search resources above or my budgeting tips here.

Budgeting Tips

Hello! If you are reading this hopefully it means you decided to make a budget. So let’s jump right in and go over some tips to making a budget.

A budget is simply a list of your income and expenses. It is easiest to make the budget on a monthly basis. The goal is to spend less than you make, with the excess going to savings.

To start your budget you will need to do some research. First you will need your net income (your pay after taxes and deductions aka the money that hits your bank account).

Next you will need an estimate on your expenses for the month. Some expenses, like rent, are a fixed amount each month, so finding that number is easy. For others the amount fluctuates. I suggest pulling your last three months of expenses and using that data to calculate a monthly average. Fortunately banks and credit card companies keep track of that spending activity and it can be easily accessed online.

While this might take a little while, this step is extremely helpful because it gives you an accurate amount of how much you spend. If you budget only $50 to eating out each month but are actually spending $150 your budget is going to get blown up in the first month. The better your data, the better your results.

List out all your monthly expenses and compare it to your income. You might find that you are spending more than you are making. In this case you need to examine your expenses and determine where you can make cuts.

If your income and expenses are equal, you still need to make cuts. That is because you want to have some money that is being saved each month.

Eventually you should come to a point where you have the finalized list of your income and estimated expenses and savings. Now you get to see how well you stick to your budget. By tracking your expenses you can see how accurate your estimated expenses are. A budget should be fluid. If there is a category you are constantly spending more you can make cuts in other categories to even things out.

Tracking your expenses might sound like a lot of work, but as mentioned in another post this only takes me about ten minutes a work. Also, there are free tools out there like Mint that will track things for you.

I would suggest using either Excel or Google Sheets for your budget. I personally use Google Sheets.

As mentioned earlier, a budget should be fluid. I would suggest revisiting your budget and making revisions when needed. You could make changes annually or when major changes to your income (new job/promotion) or expenses (house/new car) occur.

Here are some more resources that give more in-depth information on budgeting:

https://www.daveramsey.com/get-started/budget

https://www.thebalance.com/how-to-make-a-budget-1289587

The College Graduate or: How I Learned to Stop Worrying and Pay Back My Student Loans

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Congratulations. You’ve finally done it. You celebrate with your family and friends, showing off your degree. With college now behind you, you are excited to take your first step into the working world. Things get off to a slow start, as it take you a couple of months to find a job. It’s not a job doing exactly what you wanted, and it pays a little less than what you had hoped for, but it’s a job so you take it.

A few months later, the first bill for your student loans pops up in your inbox. Your minimum payment is $300 a month. Between loan payments, car payments, rent, utilities, food and gas you’re stuck living paycheck to paycheck, each month falling a little bit further behind. You start racking up credit card debt, as you can’t afford to pay off the full amount each month. Eventually you miss a loan payment, then a car payment, then rent. Your loans go into default, your car is repossessed, and you are evicted from your apartment.

Homeless, you wander the streets with nothing more than the clothes on your back and a deflated football that in your hallucinations you believe to be a dog named Snappy, scrounging for loose change so that you can buy some alcohol to forget the pain if for only a few moments. On a cold windy day, you sit on a bench with your dirt encrusted coat wrapped tightly around you. A gust of wind picks up Snappy, and blows him into the road. There, before your eyes, Snappy is crushed instantaneously by the tires of a passing car. You howl in pain as your only friend is now gone, leaving you alone. “Oh,” you weep, “oh, if only I had better managed my student loans!”

Now, that was a bit of an extreme example, but I wanted to test out my creative writing skills. So yeah, nothing like that is going to happen to you, but perhaps you might find yourself in a situation like the following:

A recent college graduate living paycheck to paycheck lies awake at night stressing over whether or not he will be able to pay his bills for the month.

A young married couple can’t go on a vacation with many of their close friends as they can’t afford the trip due to their loan payments.

An employee has to work at a soul-sucking company with an abusive boss, and is too afraid to leave because even being out of work for a couple of weeks might mean they will run out of money.

These are all much more realistic situations a person could face in their lives. Many people out there are really enslaved by their student loan debt. At the very least, student loan repayment is a major source of stress for people. This report put out by the Boston Fed showed that 57% of people with student loans are concerned about being unable to repay them. Why be enslaved to your debt? Why stress out about it?

That’s why I’m writing this blog. Hopefully, to help you learn about student loans, learn how to manage them, and ultimately how to be free from them. In the last 2 posts, I have covered the topic of student loans for someone just starting college, and for someone who is in the middle of college. In this post, I will be writing about the college graduate. A person who is working full-time, and making payments on their student loans. In other words, a person who has hit reality. It can be easy to forget about our loans when we don’t have to pay them back, but when we start getting those bills in the mail it is a whole different picture.

So, you need to start paying back your loans. How should you do this, and how can you do this the most effectively? And how can you pay back your loans so you’ll be debt-free the fastest? Well, it’s pretty simple

Step 1: Make the minimum payment on your loans each month. This one should be a no-brainer. In order to avoid having your loans go into default, you need to pay the minimum amount specified by your loan servicer each month. In this post, I discussed all of the bad stuff that happens if you default on your loans. So, in order to avoid default and everything that comes with it, the first step is to pay the minimum balance on each loan every month.

Step 2: Pay off your loans early. Paying off your loans early will save you money in the long-term, since there will be less time for interest to compound, and less principle for that interest to compound on. Not only will you save money by paying off your loans early, but it will also help you to be debt free faster.

The best way to pay off your loans as quickly as possible is take any money left over after your minimum pat on one loan, instead of spreading that extra across all of your loans.

There are two common methods used to determine which loan to prioritize payments on, which I will call the Snowball Method and the Highest Rate Method.

In the Snowball Method, any extra money above your minimum payments is put towards the loan with the lowest balance. For example, say you have three loans:

  • Loan 1 has a balance of $2,000 and an interest rate of 4.66% with a minimum monthly payment of $50.
  • Loan 2 has a balance of $8,000 and an interest rate of 7.53% with a minimum monthly payment of $100.
  • Loan 3 has a balance of $5,000 and an interest rate of 4.29% with a minimum monthly payment of $75.
  • After making a combined minimum monthly payment of $225, you have an extra $100 to put towards your loan payments. Since this is the Snowball Method, you would put that $100 towards Loan 1, which has the smallest balance. Once Loan 1 is paid off, any extra money would then go to Loan 3 (which would then have the smallest balance). Once Loan 3 is paid off, you can then put all extra money into the last remaining loan, Loan 2.

    This method is often preferred because it gives you a psychological advantage. In this method, you knock out the smallest loan quickly, then move up to the next largest loan, and so on. By focusing on the smaller loans first, you get the satisfaction of paying off a loan completely. It doesn’t matter that it may have only been a small loan, that feeling of accomplishment from wiping one whole loan off the list can keep you going in what seems like a neverending stream of loan repayments.

    I think you can better understand the appeal of the Snowball Method when you look at the other suggested method, which is the Highest Rate Method. As the name suggests, in this method you put any extra money towards the loan with the highest interest rate first. When that loan is completely paid back, you put the extra payments towards the loan with the next highest interest rate and so on.

    The advantage to this method is that you will end up saving the most money in the long run. Because you are focusing on the loans with the higher interest rates, you are giving that interest rate less principal to compound on, and less time to compound as well.

    So, if the Highest Rate Method will save you the most money, why would anyone choose the Snowball Method instead? Well, as I mentioned before, the Snowball Method will give you tangible results sooner, as it quickly knocks off your smaller loans. Applying the Highest Rate Method to our example, the first loan to be focused on would be Loan 2, which has a balance of $8,000. While putting your extra money towards that loan first will save you more money in the long run, it’s going to take a lot longer to pay off that loan.

    This is where we see the advantage to the Snowball Method. Instead of slugging through a huge loan first, you quickly knock off some smaller loans to get the ball rolling. Like making a snowman, you start small and keep on rolling until you’re debt free.

    Personally, I prefer the Highest Rate Method to the Snowball Method. But each person is different, so what is important is finding the method that will help you the most in paying off your loans. Are you the type who wants to start with the small milestones and work your way up to the big ones? Maybe the Snowball Method is better for you. Are you someone who doesn’t need any milestones along the way, and instead will be content knowing that they are saving a little extra money? Then perhaps you would fit into the Highest Rate Method.

    Whichever method you pick, the important thing is to stick with it. And this brings us to our final step.

    Step 3: Stick with it! So much of paying back your loans has to do with discipline, the discipline to keep your head down and send out those checks each month, no matter how hard it can seem. Your student loans aren’t going to go away magically on their own, and while it may seem daunting, you just need to keep on plugging away at your loans. Maybe you can make a chart of your loans, and watch the balance decrease very month to keep you going. Or maybe, you’re the type who just needs to set up the automatic payments and not think about your loans until they’re paid off. But you need to stick with your repayment plan; many people fall off the wagon and find themselves right back where they were at the start. Don’t let this be you!

    So, in conclusion, it’s pretty simple. There are 3 steps to paying back your loans and being free from that debt. In case you forgot already, those steps are:

    Step 1: Make all the minimum payments on your loans.
    Step 2: Choose either the Snowball or Highest Rate Method for your extra payments.
    Step 3: Stick with it!

    Follow these steps, and you will find yourself on the way to debt freedom!

    P.S. I wrote out the whole blog and realized I forgot to add one part in. I didn’t really want to go back and edit it in, so I threw it down here. When making extra payments to a loan, be sure to specify that you want that extra money to go towards the principal of the loan. Some loan companies will try to screw you by applying it to the interest, so make sure you instruct them to put that towards the principle. It’ll save you money that way.